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    Discounting, Writedowns Wallop Kroger's Q4 Earnings

    CINCINNATI -- Kroger Co. here yesterday blamed the impact of sharp discounting, along with charges from writedowns of two of its underperforming divisions, for lower-than-expected operating earnings in the fourth quarter ended Jan. 29.

    CINCINNATI -- Kroger Co. here yesterday blamed the impact of sharp discounting, along with charges from writedowns of two of its underperforming divisions, for lower-than-expected operating earnings in the fourth quarter ended Jan. 29.

    As it had announced previously, Kroger said the quarterly results are preliminary, and the company will restate prior-year results to correct its accounting for leases.

    On news of the preliminary results, Kroger stock fell 87 cents, or 4.9 percent, yesterday to close at $16.85 on the New York Stock Exchange. The stock has traded between $14.65 and $19.30 the past year.

    For the fourth quarter, Kroger reported a net loss of $675.9 million, or $0.93 per share. The results include a goodwill impairment charge of $884.0 million after tax, or $1.21 per share, related to the Ralphs and Food 4 Less operations.

    In the year-ago period, Kroger had a net loss of $337.4 million, or $0.45 per share.

    Sales in the quarter were a better story for Kroger. Total sales 2004 increased 5.1 percent, to $13.7 billion. The chain attributed that growth to strong performance in its food stores, especially in the fuel category; as well as a solid showing from its convenience operations and jewelry stores.

    Identical food-store sales including fuel were up 2.1 percent. Excluding fuel, they were up 0.8 percent.

    "We are very pleased with our sales performance in the fourth quarter," said chairman and c.e.o. David B. Dillon in a statement. "Kroger's identical food-store sales, without the effect of fuel and southern California, have shown sequential improvement for seven of the past eight quarters. This is a clear sign that Kroger's strategic focus on fulfilling the needs of our customers continues to generate positive results."

    Dillon said the successful execution of Kroger's strategy produced strong cash flow, enabling the company to continue its "financial triple play" of reducing total debt by nearly $400 million, repurchasing $318.7 million in stock, and investing $1.6 billion in capital projects.

    However, Kroger found itself needing to be more aggressive on pricing in the fourth quarter than it had planned to be, vice chairman Rodney McMullen told analysts during a conference call yesterday. He said the retailer will try to rely less on costly promotions this year, and will focus more on cutting labor costs and losses from theft and spoilage.

    Dillon noted during the conference call that Kroger is currently more focused on non-price initiatives to improve sales, to take some of the pressure off of margins.

    Kroger said it expects 2005 net earnings to increase compared to 2004, excluding the effect of a goodwill impairment charge. This would be fueled by improved results in southern California, growth in the balance of the company, and lower interest expense. As a result, Kroger said it expects net earnings in 2005 to exceed $1.16 per diluted share.

    Among the retailer's other stated goals for 2005 are achieving in excess of 2.0 percent identical food-store sales growth; investing $1.6 to $1.8 billion in capital projects, excluding acquisitions, as it focuses on remodels, merchandising, and productivity improvements; and adopting expensing of stock options during the year.

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